The Yuan Dynasty: China’s Bid to Replace the Dollar

Chinese government officials recently informed Washington of intentions to ‘slow’ or outright ‘halt’ state purchases of US Treasury bonds. The economic realities underlying Beijing’s report caused noticeable effects on the bond and stock markets. Wider geopolitical considerations were certainly felt among analysts, government officials and within industry. With the Trump Administration’s looming trade war against China sitting alongside threats posed to Chinese allies North Korea and Iran, China’s palpable concerns – and China’s perceived need for putting its largest trade partner on notice over said concerns - are hardly a secret to either side or to the rest of the world. China’s intended move to price energy resources and other commodities in its own currency is interrelated to potential bond dumping issues. In this episode of Money & Fear, we’ll review the underlying fiscal and political stakes, which make this latest Chinese announcement hard to ignore, and speak to rising risks of approaching conflict between the US and China.

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thanks for this excellent analysis. if i understand correctly, since the fall US financial firms such as JP Morgan have greater freedom to operate freely in China; would you kindly comment on this & its implications for US debt markets?

Because it’d be the very sort of ‘asset cannibalization’ which has accounted for the rising loss of confidence triggering the selling or ceasing of purchase of US Treasuries in the first place, and not just from Beijing, either. Because it’d confirm foreign fears further over rising risks of ‘unmanageable’ inflation domestically, let alone of a spiraling dollar.

Plus, what would be the point of issuing said bonds to foreign buyers in the first place if the Fed were to buy up said ‘slack’? Further, what’d be the point of having an interest rate mechanism?

Thank you for responding to my query. I very much appreciate your analyses, but don’t your arguments apply since 2008? The Bank of Japan is buying up everything – government and corporate bonds, shares. The GDP to debt ratio is 200%! This has gone on for twenty years and Japan is still there. Minsky would be turning in his grave. When will, must this stop? What would happen to China, if it sold all its Treasuries?`It would have no foreign exchange reserves.

Yes, it’s gone on since the 2008 Financial Crisis, which was never fully ‘resolved’, but just papered over. There’s a wider ‘transition’ planned over the medium to longer term, yet the confidence/perception switch is flipped with deep finance decides that it is, because the fundamentals clearly do not add up on their face today.